1. Court’s decision
The Bombay High Court dismissed a writ petition filed by a cooperative credit society seeking to implead a SARFAESI auction purchaser (Respondent No.2) as a party in execution proceedings arising out of a 2010 award against a defaulting sugar factory (Respondent No.1). The Court held that the liabilities owed by Respondent No.1 to the petitioner were business liabilities, not property-related liabilities, and therefore did not travel with the assets sold under the SARFAESI Act.
Relying on Supreme Court precedents (Shreyas Papers, Rana Girders), the Court held that an auction purchaser is liable only for dues attached to the secured assets, not for debts arising from the erstwhile owner’s business unless the entire business is transferred as a going concern — which was not the case here.
The Executing Court’s refusal to implead the auction purchaser was therefore upheld.
2. Facts
The petitioner, a cooperative credit society, had advanced substantial funds to a sugar factory (Respondent No.1). Upon default, the petitioner initiated Dispute No. 320/2009 before the Cooperative Court, which in 2010 passed an award for ₹11,71,648 with 16% interest. Execution proceedings were filed in 2012.
Meanwhile, the Maharashtra State Cooperative Bank, acting as a secured creditor, issued a notice under Section 13(2) of the SARFAESI Act, took possession of Respondent No.1’s secured assets, and auctioned them. Respondent No.2 emerged as the successful bidder and received possession via panchanama dated 08.09.2014.
The petitioner then applied (Exh. 64) in the execution for impleadment of Respondent No.2 on the ground that the auction purchaser had accepted all encumbrances and must therefore shoulder Respondent No.1’s dues. The Executing Court rejected the application on 09.08.2021. The petitioner challenged that order.
3. Issues
The High Court addressed:
• Whether an auction purchaser of secured assets under SARFAESI can be impleaded in execution proceedings relating to a business debt of the original borrower;
• Whether tender conditions stating that the purchaser accepts “all encumbrances” create liability to discharge cooperative credit dues;
• Whether the Executing Court exceeded jurisdiction by evaluating the liability of the auction purchaser;
• Whether the petitioner’s dues could be classified as “dues to the property,” thereby binding the auction purchaser.
4. Petitioner’s arguments
The petitioner argued that the tender notice and sale certificate showed that Respondent No.2 had expressly agreed to bear all existing and future liabilities attached to the property. Since Respondent No.2 had taken over the assets and continued to operate the entire sugar factory, it must be treated as having stepped into the shoes of Respondent No.1 with respect to all liabilities.
The petitioner emphasised the wording of the tender: “all encumbrances presently on property and which may arise in future shall be borne by the purchaser.” It asserted that the auction purchaser, having acquired the entire business infrastructure, could not avoid responsibility for clearing the society’s awarded dues.
The petitioner further contended that the Executing Court wrongfully assessed liability at the impleadment stage and should have allowed the purchaser to be added as a party first.
5. Respondent’s arguments
Respondent No.2 argued that it had purchased only the secured assets, not the business of the sugar factory. Under SARFAESI, assets are sold strictly on an “as is where is, as is what is” basis. The tender notice expressly disclaimed responsibility for business debts unrelated to the secured property.
They argued that the dues owed to the petitioner were unsecured business debts, not liabilities “attached” to the property. Respondent No.1 continues to exist as a legal entity and remains responsible for its debts.
Respondent No.2 relied on Supreme Court authorities establishing that auction purchasers under SARFAESI are not liable for business-related government dues (tax, excise, etc.), let alone unsecured private debts. They argued that impleadment was therefore impermissible.
6. Analysis of the law
The Court began by analysing the tender’s disclaimer clause: the bank sold the assets “as is where is,” expressly disclaiming responsibility for shortfalls, permissions, or outstanding dues, including statutory dues like provident fund, electricity charges, sales tax, and excise. These liabilities had to be borne by the purchaser only to the extent they were attachable to the asset.
The Court held that the petitioner’s dues — arising out of financial advances — were business liabilities, not property-based encumbrances. They were not secured debts, nor were they notified dues appearing in the encumbrance column of revenue records.
Under SARFAESI, when assets of a dormant business are sold, the auction purchaser does not inherit the business’s liabilities unless the entire business as a going concern is transferred. Here, the sugar factory had shut operations long before the auction; only assets were sold, not the business itself.
The Executing Court was justified in examining this at the impleadment stage because impleadment depends on whether the petitioner can show some legally enforceable liability against the proposed party.
7. Precedent analysis
1. State of Karnataka v. Shreyas Papers (2006) 1 SCC 615
The Supreme Court held that business liabilities cannot be fastened on an asset purchaser unless the business is transferred as a going concern. The High Court found this directly applicable — Respondent No.2 bought assets, not ownership of business.
2. Rana Girders Ltd. v. Union of India (2013) 10 SCC 746
Held that an auction purchaser is not responsible for excise dues of the previous owner unless the entire business is purchased. Reinforced that purchaser is liable only for dues lawfully attached to property. Applied to hold that unsecured cooperative dues do not bind the purchaser.
3. National Steel & Agro Industries (2015 Bom)
A Division Bench of the Bombay High Court similarly held that unless statutory provisions impose first charge or unless business is acquired as a whole, auction purchasers cannot be burdened with prior business debts. Applied with full force.
8. Court’s reasoning
The Court reasoned that:
• Respondent No.2 never acquired Respondent No.1’s business; it bought only assets of a closed factory.
• The petitioner’s dues are not “dues to the property” but arise from financial transactions with Respondent No.1.
• The tender and sale certificate do not override statutory limits; liability for business debts cannot be contractually imposed via auction terms.
• Impleadment requires a prima facie connection between the party and the liability sought to be enforced — which was absent.
• The Executing Court correctly examined the nature of liability at the threshold and committed no jurisdictional error.
The Court held that the petitioner had been non-diligent during the SARFAESI auction process and could not now shift liability to the auction purchaser. The writ petition was therefore rejected.
9. Conclusion
The High Court found no illegality in the Executing Court’s refusal to implead the auction purchaser. The petitioner had no right to fasten its unrelated, unsecured business dues onto Respondent No.2. The writ petition was dismissed and the rule discharged.
This judgment reinforces the distinction between asset purchase and business succession, and the limits of liability under SARFAESI auctions.
10. Implications
This ruling has wide implications for cooperative societies, lenders, and auction purchasers:
• SARFAESI auction purchasers inherit only property-attached liabilities, not unsecured debts.
• Financial creditors must remain vigilant during SARFAESI auctions; failure to secure or notify claims precludes later enforcement against purchasers.
• Execution proceedings cannot expand liability beyond what law imposes, even via tender wording.
• Courts will closely scrutinise attempts to add auction purchasers as judgment debtors.
• The distinction between asset sale and business transfer remains crucial for determining liability.
CASE LAW REFERENCES
Shreyas Papers (2006) 1 SCC 615
Liability passes only when business is transferred as a going concern.
Rana Girders (2013) 10 SCC 746
Auction purchaser of assets not liable for excise dues/business liabilities.
National Steel & Agro Industries (2015 Bom)
No liability for auction purchaser absent statutory first charge.
(All applied by the Court.)
FAQ SECTION
1. Is a SARFAESI auction purchaser liable for the previous owner’s business debts?
No. Unless the entire business is transferred as a going concern, an auction purchaser is liable only for dues attached to the secured assets.
2. Can unsecured cooperative credit society dues bind an auction purchaser?
No. Such dues are business liabilities of the borrower and do not attach to property sold under SARFAESI.
3. Can a purchaser be impleaded in execution solely because they acquired assets?
No. Impleadment requires legal liability. Mere acquisition of property does not make the purchaser liable for unrelated financial debts.